Investing in a VCT is a relatively low-cost way to access the benefits of a professionally run portfolio. But remember, with any equity investment your money is at risk.

VCTs employ a professional fund manager to make the day-to-day investment decisions. All VCTs aim to buy into companies that have the potential for good growth, but you should remember that they buy shares in small, often privately owned and young companies which may or may not succeed. They can be a much riskier investment than investing in larger, more established companies.

If you subscribe for new VCT shares – shares bought when the VCT launches or raises new money – you can get income tax relief. This tax relief can reduce your income tax bill to zero but there are limits on how much you can invest.

If you buy shares on the secondary market (i.e. someone else owned them before you) you can’t get tax relief on your initial investment, but you can still get tax-free income and capital gains.

VCT tax benefits

The table below shows the current tax benefits available on VCT shares:

Tax free capital gains

Yes

Rate of income tax relief on subscription

30%

Maximum investment eligible for for income tax relief

£200,000

Minimum time investor must hold VCT to qualify for income tax relief

5 years

Tax free dividends

Yes

Tax reliefs only apply to people aged 18 years or over who are UK income tax payers, and are only available if the trust maintains VCT status. The relief you get depends on your individual circumstances.

These tax rules may change in future. HM Revenue & Customs law and practice can change over time and investors who are unsure about their tax status should get independent advice from a professional adviser such as a solicitor, accountant, stockbroker or independent financial adviser.

Like all investment companies, VCTs have rules they must adhere to, set out by the management company and board of directors. But they also have to comply with additional rules in order for investors to receive tax relief.

The main rules are:

At least 70% of their investments must be in qualifying investments – small companies (maximum size £15 million) that are unquoted or traded on the AIM rather than the main stock market.

They must invest in the companies within three years of raising new money. Keep in mind that they may invest elsewhere while making these decisions, so the risks can be different.

If a VCT doesn’t meet these rules it could lose its approved tax status. You would lose your income and capital gains tax benefits.

The remaining 30% of a VCT’s money can be invested in essentially any investment. These are often stable investments like cash, listed equities and large company debt instruments. Some VCTs use higher risk options, which increase the overall risk of your investment. You should be able to read about the strategy in the VCT's prospectus and other literature. Make sure you know the facts so you can compare different VCTs.

It’s hard to know exactly what a VCT’s portfolio is worth. Because the shares of unquoted companies aren’t freely traded on any recognised stock exchange, there’s no exact market value.

A VCT’s board of directors uses valuation methods, based on established principles (for example, the British Private Equity and Venture Capital Association’s Valuation Guidelines or the International Private Equity & Venture Capital Valuation Guidelines) to estimate the value of each private company shareholding. They can only be estimates. Sales depend on a willing buyer and the price they are prepared to pay at that time.

The extra work involved in performing these valuations means that VCTs will often only value their portfolio every three or six months. It also means that figures you see published may have been calculated weeks, or even months, earlier. This may be very different to the current share price.

AIM traded, and other investments traded on stock markets, are easier to value because there’s a quoted market price.